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Net Neutrality on the Internet: A Two-sided Market Analysis

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Abstract

We discuss the benefits of net neutrality regulation in the context of a two-sided market model in which platforms sell Internet access services to consumers and may set fees to content and applications providers “on the other side” of the Internet. When access is monopolized, we find that generally net neutrality regulation (that imposes zero fees “on the other side” of the market) increases total industry surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content and applications providers. Similarly, we find that imposing net neutrality in duopoly increases total surplus compared to duopoly competition between platforms that charge positive fees on content providers. We also discuss the incentives of duopolists to collude in setting the fees “on the other side” of the Internet while competing for Internet access customers. Additionally, we discuss how price and non-price discrimination strategies may be used once net neutrality is abolished. Finally, we discuss how the results generalize to other two-sided markets.

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File URL: http://www.stern.nyu.edu/networks/Economides_Tag_Net_Neutrality.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 07-45.

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Length: 31 pages
Date of creation: Sep 2007
Date of revision: Nov 2007
Handle: RePEc:net:wpaper:0745

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Web page: http://www.NETinst.org/

Related research

Keywords: net neutrality; two-sided markets; Internet; monopoly; duopoly; regulation; discrimination;

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References

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  1. Hermalin, Benjamin E. & Katz, Michael, 2007. "The Economics of Product-Line Restrictions With an Application to the Network Neutrality Debate," Working paper 541, Regulation2point0.
  2. Nicholas Economides & Evangelos Katsamakas, 2004. "Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry," Working Papers 04-22, NET Institute, revised Aug 2004.
  3. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  4. David K. Backus & Jonathan H. Wright, 2007. "Cracking the Conundrum," Working Papers 07-22, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Chen, M. Keith & Nalebuff, Barry, 2006. "One-Way Essential Complements," Working Papers 22, Yale University, Department of Economics.
  6. Keith M. Chen & Barry Nalebuff, 2006. "One-Way Essential Complements," Levine's Bibliography 321307000000000669, UCLA Department of Economics.
  7. Jay Pil Choi & Byung-Cheol Kim, 2008. "Net Neutrality and Investment Incentives," Working Papers 08-03, NET Institute.
  8. Rochet, Jean-Charles & Tirole, Jean, 2006. "Two-Sided Markets: A Progress Report," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  9. Nicholas Economides, 2007. "“Net Neutrality,” Non-Discrimination and Digital Distribution of Content Through the Internet," Working Papers 07-03, NET Institute.
  10. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, 09.
  11. Hahn, Robert W. & Litan, Robert E., 2006. "The Myth of Network Neutrality and What We Should Do About It," Working paper 428, Regulation2point0.
  12. Austan Goolsbee, 2006. "The Value of Broadband and the Deadweight Loss of Taxing New Technology," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 0(1), pages 8.
  13. Krämer, Jan & Wiewiorra, Lukas, 2009. "Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate," MPRA Paper 16655, University Library of Munich, Germany.
  14. Nocke, Volker & Peitz, Martin & Stahl, Konrad O., 2004. "Platform Ownership," CEPR Discussion Papers 4657, C.E.P.R. Discussion Papers.
  15. Wright, Julian, 2003. "One-Sided Logic in Two-Sided Markets," Working paper 382, Regulation2point0.
  16. Christiaan Hogendorn, 2006. "Broadband Internet: Net Neutrality versus Open Access," Working Papers 2006-09, Center for Network Industries and Infrastructure (CNI).
  17. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
  18. Amelio, Andrea & Jullien, Bruno, 2007. "Tying and Freebies in Two-Sided Markets," IDEI Working Papers 445, Institut d'Économie Industrielle (IDEI), Toulouse.
  19. Jean-Charles Rochet & Jean Tirole, 2003. "An Economic Analysis of the Determination of Interchange Fees in Payment Card Systems," Review of Network Economics, De Gruyter, vol. 2(2), pages 2.
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Citations

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Cited by:
  1. Edmond Baranes & Jean-Christophe Poudou, 2011. "Internet access and investment incentives for broadband service providers," Working Papers 11-09, LAMETA, Universtiy of Montpellier, revised Apr 2011.
  2. Jay Pil Choi & Byung-Cheol Kim, 2008. "Net Neutrality and Investment Incentives," Working Papers 08-03, NET Institute.
  3. Robin S. Lee & Tim Wu, 2009. "Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 61-76, Summer.
  4. Nicolas Curien, 2013. "Net Neutrality is Imperfect and Should Remain So!," RSCAS Working Papers 2013/22, European University Institute.

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